Friday, January 1, 2010

Long-Term Gas Delivery Contracts?

Another interesting article in the Wall Street Journal this week noted that some natural gas companies are approaching customers for long-term contracts.  This is a very interesting step for lots of reasons.  Most importantly, it is a concession from the gas producers that they don't expect the price of natural gas to go up significantly any time soon.  Signing up customers to long-term contracts takes a page out of the coal industry's book, which makes sense if you think you have a large, consistently reliable source of product.

The article notes that the gas producers have had little luck selling long-term contracts, which makes some sense.  After seeing prices dip to $2/MMBtu last year, I doubt many consumers will want to lock in prices north of $6.  Customers can hedge prices on their own.  It is unlikely that they would want to lock themselves into supply contracts that might have take-or-pay clauses.  Many utility customers with long-term coal contracts have built large stockpiles of unused product that just keeps coming even though they temporarily switched to natural gas for power generation.

Ultimately, many customers probably see that the supply and demand forces in the market will "bracket" the price of gas at reasonable levels for the foreseeable future.  But it's still an interesting sign from the natural gas industry.

No comments: